Dynasty of domesticity in a legal pickle

On the cover of her latest Kmart paint catalog, Martha Stewart is still smiling in blue jeans and a button-down shirt as she sits on a floor mixing bright country colors.

In real life, though, Ms. Stewart's summer has been about as cheery as following this advice from her famous calendar: "If it rains, organize basement."

A stock-trading scandal is chipping away at her image as America's doyenne of simple good taste. Faced with government probes and shareholder lawsuits, the ubiquitous pitchwoman is suddenly as scarce as a deflated soufflé in her kitchen.

So far, sales of Stewart brand goods ranging from magazines to lawn furniture aren't hurting. But observers say Stewart risks sinking her media and retailing empire unless she resolves the mess soon.

"All of these things are a house of cards that are on the verge of collapsing if she doesn't get hold of the crisis swiftly," says Steven Fink of Lexicon Communications, a Los Angeles crisis-management consulting firm.

Last week, Stewart handed over 1,000 pages of documents to congressional investigators probing her sale of shares in a friend's company right before the stock plummeted. Meanwhile, unhappy shareholders in her own company, Martha Stewart Omnimedia, sued her.

Stewart is accused of selling 4,000 shares of stock in ImClone Systems Inc. last December, one day before the company's stock plunged after news that the government had rejected its application for a highly anticipated drug therapy.

Her friend, ImClone CEO Samuel Waskal, has been charged with trying to sell his shares and tipping off family members about the impending bad news.

Stewart, a former stockbroker herself, contends she had a preexisting agreement to sell the stock automatically if it fell below a certain price.

Stewart netted about $227,000 in the sale. But since the sale was disclosed, the share price of Martha Stewart Omnimedia has fallen in half, reducing her net worth by more than $200 million.

While such sales often attract the attention of the Securities and Exchange Commission, the revelations couldn't have come at a worse time, says Eugene Propper, a former federal prosecutor and expert on corporate fraud.

With fraud allegations wiping out the value of companies such as WorldCom, Stewart's stock trades quickly attracted congressional investigators, too.

Stewart did little to help her cause with awkward public statements. During a regular appearance in June on CBS's "The Early Show," Stewart referred to the controversy, while chopping vegetables in a kitchen, as "ridiculousness."

She has since stopped appearing on the CBS show and has scaled back other appearances this summer, a Stewart company spokeswoman says, but continues her regular schedule of business activities, including taping episodes for her daily syndicated television show.

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